“This move is stupid”
“It makes no sense”
“It’s not sustainable”
“Who the hell is buying at these levels?”
Now, maybe you’ve said something along these lines in the past. I mean the market doesn’t always make sense. John Maynard Keynes said it best, “The market can stay irrational longer than you can stay solvent.”
For example, recently we’ve seen a lot of sector rotation following the Presidential elections. Traders have started placing their bets on which areas of business are going to improve under a Trump regime.
With that said, we’ve seen a pretty phenomenal move in the Russell 2000 Index.
In November, it went on a 15-day straight winning streak. It pulled back a little, and thereafter, it recaptured highs again.
With that said, sometimes you’ll get caught in a trade, and the move is unprecedented. One of your goals as a trader is to live and fight another day. As silly as this move appears to be…the buyers were not letting up. In this case, the buyers are institutions that have much deeper pockets than you and I.
It’s important to have a line in the sand and stick to your plan. For example, let’s say you took the short in IWM and decided to get out if it rose 5%. If that was your plan…you need to stick with it.
You Can’t Fight The Tape
One possible way of answering this question is setting a dollar amount you’re willing to lose. In addition, pick a level in which you want your out to be. For example, let’s say you short IWM at $122 and your out is $125. If you’re only willing to lose $1,500 on the trade, you will short 500 shares.
You see, that is a plan. Now, I’m not saying it’s the correct one or there are not better ones out there…however, it’s important to have a plan.
Too many times traders don’t have a plan… and they get caught up in the silliness of the market… get emotional and frustrated… then end up losing a lot more money than they wanted too in the first place.
The market is bigger than you and I, don’t allow yourself to get trapped and have one bad trade destroy your account.